a) Calculate the 120-day AUD/USD forward points if the spot rate is AUD/USD 0.80 and interest rates are 1% in the US and 3% in Australia. Use a 360-day year for the US and a 365-day year for Australia. Hint: AUD/USD is stating how much 1 AUD buys in the foreign currency. (3 marks)

b) Explain why somebody who wants to benefit from the interest rate differential (carry) should or should not buy the forward from a). (3 marks)

c) Calculate the rate of return for a one year carry trade investment of 800,000 USD if the exchange rate remains unchanged.